Moving beyond U.S borders to include global investments in your portfolio offers both potential benefits and meaningful risks. As with nearly anything in the investment world, the prudence of including a global component to your portfolio is dependent on your specific risk tolerances, goals and level of sophistication. In simpler terms, the answer to whether global investments are a good idea: it depends.
Pro and Cons of Global Investments
The two primary arguments for including international investments in your portfolio are:
- You might get higher returns.
- These returns can be uncorrelated to the return of U.S. investments.
With U.S. interest rates having remained at low levels for the last several years, rates in many other countries are significantly higher. For example, in May 2014, GOBankingRates reported that Ukraine was offering one-year CDs with a 19.00% APY. This means that even on a mundane investment like a CD, including a global investment from a less stable country could dramatically improve the yield you get on your money.
The other side of this argument, however, is that with higher return comes far greater risk. The political unrest at play in the Ukraine, for example, means that there is a real risk that you might never get back your money. The reason why the U.S. dollar is one of the main reserve currencies of the world is its stability, not necessarily the return that it affords. Unless you can afford to lose the portion of your portfolio invested in some of the more exotic locales around the global, you might consider sticking to the most stable economic systems.
The other advantage of making international investments is that some have lower correlations to U.S. markets. Correlation refers to the strength of the relationship between two different investments. So, a perfect positive correlation would be if investment A and investment B move up or down at the same time; a perfect negative correlation would be if A moves up while B moves down.
Placing assets in uncorrelated assets could provide diversification. As Forbes explained in 2012, “Given the lower correlation of returns across countries, it is reasonable to expect that international stock returns can be quite different from U.S. stock returns. But it is this low correlation that produces the large diversification benefit of investing internationally.” Buying diversifying global investments should improve your long-term performance.
How to Approach International Investing
When considering adding an international investment to your portfolio, you should first consider the risk. Different asset classes and different regions have different risk profiles. For example, the bond markets of developed nations tend to offer less risk and return than the equities of emerging and developing nations. It is important to understand your own risk tolerance and individual goals when deciding what assets might be appropriate for your portfolio.
Once you have assessed your risk tolerance, you need to determine what portion of your portfolio should be allocated to global investments. Different experts recommend different allocation sizes based on your goals. For example, Fidelity suggests that a balanced portfolio should have a 15 percent allocation to international equities. But if your goal is to have a portfolio with aggressive growth, the financial service recommends allocating 26 percent of your portfolio to international equities.
Best and Worst International Investments
Classifying an investment as best or worst largely depends on your risk tolerance and investment goals. It also depends on who you ask. For example, investing in emerging markets funds comes with risks, but chief global investment strategist for Charles Schwab & Co., Jeffrey Kleintop, said that “emerging-markets stock are due for a sustained upturn,” reports Kiplinger.
TIME’s “Money 50: Best Mutual Funds and ETFs” lists a few of what it considers the best foreign funds of 2015, including Fidelity Spartan International, Dodge & Cox International, Vanguard International Growth and Vanguard Emerging Markets. For its “25 Best Stocks for 2015” published in January, Kiplinger listed Denmark’s Novo Nordisk and Japan’s Fujifilm Holdings, with Novo Nordisk expected to grow 14 percent and Fujifilm Holdings projected to grow 10 percent.
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Overall, there is a benefit to global investments in that they provide diversification. These factors can work together to improve your return over time, so considering them for your portfolio is appropriate — as long as they make sense in your overarching investment plan. Once your risk tolerance has been defined, you should consider which investment instruments make the most sense in helping you reach your goals.